Good questions lead to surprising story

By Michael R. Fancher

Seattle Times editor-at-large

Biotechnology reporter Luke Timmerman started with a couple of questions and found some jaw-dropping answers.

In today's Seattle Times special report, "Selling Drug Secrets," Timmerman and investigative reporter David Heath reveal what should emerge as a major scandal in medical research and financial-market manipulation. Timmerman's questioning started late last year when he reported on unusual trading activity in the stock of a local biotech firm. The stock had traded at three times its normal volume the day before the company released some unexpected bad news.

"I was blown away when Wall Street analysts told me they didn't see anything wrong or unusual," Timmerman said. It was never clear what had caused the unusual trading of that stock, but Timmerman got curious about the volatile nature of biotechnology as a business.

His curiosity took him in a new and unexpected direction when he got a tip that hedge funds were paying doctors for information about clinical trials. (Hedge funds are unregulated investment pools for wealthy private and institutional investors. They use high-risk aggressive strategies not available to mutual funds.)

The tipster couldn't provide documents or proof, but he pointed in what turned out to be the right direction. "Basically, we got a tip from a first-rate whistleblower and ran with it," Timmerman said.

Timmerman told Rami Grunbaum, deputy business editor, what he was exploring. Grunbaum said his reaction was, "You're never going to get that. Who the hell is going to admit it?"

Nonetheless, he encouraged Timmerman to pursue the story. Timmerman approached Heath to partner on it. The investigative reporter had extensive experience reporting on medical trials and on insider trading in Internet startups. James Neff, Times investigations editor, added his expertise.

"I dove into it full time in March, calling lots of sources and making new ones," Timmerman said. "Many of my best sources had never heard of this, so I thought it might be a dead end."

Eventually, through sourcing and documents, the reporters were able to uncover how confidential information is leaking out of clinical trials into the financial markets. Heath said their effort was aided "by people in the business who were offended by doctors breaking their vows to keep secrets."

"We thought it would be impossible to document, but we quickly found analyst report after analyst report that said, 'We talked to doctors doing research and they told us how it was going.' Anyone who knows anything about medical research knows that these doctors aren't supposed to divulge details."

Timmerman said, "The things that we have found shocked me on an almost daily basis this summer," adding that many industry insiders had the same reaction.

Heath added: "What really struck me was how widespread this practice is, yet only those involved seem to know about it. Some analysts argued that the practice of paying doctors can't be wrong or else the Securities and Exchange Commission would have shut it down. But the SEC seemed unaware of it.

"Many of the legal and medical experts we talked to were stunned that doctors were selling secrets. Yet most of the people we talked to in the securities business knew about the practice. Some of them had qualms about it, but many didn't."

Grunbaum said what's happening has a profound effect on biotech firms. If inside information about the newest Chevrolet pickup is revealed prematurely, it's not going to make that much difference in the financial markets because General Motors is a giant, developed company.

With biotech firms, the success or failure of a drug trial can mean volatile changes in their stock.

"It's a binary effect, and if you know which way a clinical trial is going to go, you know what's going to happen with the stock," Grunbaum said.

Neff added that hedge funds can take advantage of short-term swings in the market and can profit dramatically from knowing that bad news is going to tumble a stock. Doctors play down the significance of information they are giving, and analysts argue they aren't doing anything wrong, but "our experts say this constitutes insider information," Neff said.

"The honest investor loses," and drug research can be compromised, he added.

What comes next depends on whether regulatory agencies use their subpoena power to find out information that's beyond the reach of journalists. I suggest they follow the advice we give to The Times staff: